Tuesday, August 16, 2011

Fixing Our Broken Finance

It's forty years since President Nixon took the US off the gold exchange standard. Since then the dollar has declined from $35 per ounce of gold to the present $1,800 per ounce. Not good. With the dollar as paper, our ruling class has expanded credit, government debt, and near government debt recklessly, and ordinary savers, people who save money in banks and bonds, have been screwed. The question is: what do we do?

Actually, I think there are two questions. What does each of us do individually, and what should we do collectively.

Let's get me, individually, out of the way first. I reckoned, back in the early days of the current recovery, that the government was going to print money big time. So I determined not to hold more than a minimum in dollars. Thus I converted my cash into gold ETFs and resolved not to hold dollar-denominated bonds. The stock market may go up and down, I reckoned, but it represents the wealth-generating power of the US economy. The dollar may go to zero, but the US economy won't. Nor will gold.

But what about the nation as a whole? What should we do to stop the damage? The easy solution is to say: get back to gold; set a new gold price for the dollar and stick to it. The problem is that this doesn't solve the other problems, the moral hazard of the central bank as the lender of last resort, the resort to inflation to gun the economy in a recession, and the dense net of credit subsidies embedded in the economy. It will be difficult to fix any of those things because the current ruling class gets so much of its power from their continuance.

I'm going to go out on a limb. I think that a new credit and monetary system is going to grow up alongside the current government-dominated system. The Dutch finance system of central bank, funded government debt, discounted short-term debt, and money-denominated bonds is going to wither away. Because the government abuses it so badly.

The modern financial system began, they say, with people depositing their gold with goldsmiths, who then started to lend money on the credit of the deposited gold. In our present world we have gold ETFs that are supposedly storing gold in vaults in return for electronic depositary receipts. How long can it be before someone figures out a way to turn the gold ETFs into a kind of bank? Don't ask me how. That is for those financial wizards and their lawyers to figure out. But right now a ton of people are sterilizing their cash by storing it in gold in the vaults of the ETFs. Not good. Nature abhors a vacuum and finance abhors one too. Finance is all about getting money from where it is to where it is wanted. Something has got to give, and sooner or later it will.

1 comment:

What can we do next after we fix the price of gold? I don't remember who was the one debating about in this next presidentional election but he stated strongly about trying to fix the price and legal tender of gold and silver. Do you remember his name?